Starbucks/Nestlé: complex brew

Walk into a Starbucks and the gap between the price of an iced skinny cinnamon dolce latte and its ingredient costs may leave you perplexed. It is the same with the landmark transaction struck with Nestlé. The groups confirmed talk of a tie-up in which Nestlé is buying the perpetual right to distribute Starbucks’ packaged coffee around the world. A sum of $7.2 billion is changing hands, but it is not as simple as that. The muted response from Starbucks shares yesterday showed as much confusion among investors as its menus can evoke. The at-home coffee market appears to be narrowing to a two-horse race between the JAB Holdings empire and Nestlé, whose existing consumer brands include Nespresso and Nescafé. The deal is structured as a licensing agreement… But what concerned the market yesterday was Starbucks’ statements that earnings per share would not begin to rise for perhaps three years. The company’s revenue growth would be reduced by two to three percentage points from the sales it was now ceding to Nestlé… The brighter lens through which the US company views the deal is evident. Starbucks has a strong brand, which allows it to receive upfront cash as well as a cash stream from Nestlé… Customers may not care much what ingredients go into each Starbucks brew. More discerning investors can scrutinise the components of this deal — and still come away perked up.
 
Lex.

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